The Development of the German Real Estate Market – Persistent Heyday Or Coming Crash?

The past years have been very successful for the German real estate market. The question arising is what will happen in the next years. Will rents and sale prices rise even further? Or is a depression coming after the heyday? The spring report of the German real estate magazine “Immobilienwirtschaft” shows the pessimistic estimation of the real estate research provider Empirica. After that, Bulwiengesa, another leading consultancy in the real estate sector, contradicts in a different report. Let’s have a look at the arguments.

End of Exorbitant Sale Prices, End of Cycle of Rents

First of all, Empirica claims the declining rise of sale prices for condominiums. In 2017, the prices increased by 7,9% which is a smaller growth than one year before (8,8%). Here, they see a weakening cycle of sale prices already lasting for 8 years now. Moreover, Empirica identifies the declining immigration combined with the increasing offer of apartments as a reason for the slow-down of the price increases. In 2017, about 300,000 apartments emerged. This year, the amount is even expected to rise. Also, Empirica anticipates an end of the exorbitant sale prices with a plus of up to 30% in A-cities. Particularly the wave of new apartments could exert pressure on the prices. Empirica states an expected decrease of the purchase prices of one quarter to one third in Munich, Berlin and possibly Stuttgart.

Bulwiengesa Questions the Influence of Immigration and Building Permissions

Bulwiengesa goes into two main points in their reactionary report: The influence of immigration and the amount of building permissions on the sale prices and rents. They see a persistent momentum in the central cities due to attractive possibilities to earn a living, stable economic circumstance and various offerings for leisure. In addition, even during the weak years of 1994-1999 no adjustment of prices have occurred. Moreover, not every building permission is necessarily connected to a building completion. There is still demand for housing space. Also, Bulwiengesa criticizes the general relation of supply surplus and the decrease in prices: “We do not expect a decline in the prices in Berlin-Mitte because of empty apartments in Spandau.”

Consensus About Cycle of Real Estate Markets

Both, Empirica and Bulwiengesa agree on the fact that the German real estate market is cooling down. In doing so, Bulwiengesa refers to the German Property Index. They state that the moment and the extent of the slow-down of the real estate market depends on the level of interest rates and the real economy, though. Here, we agree with Bulwiengesa: These days, yields that are scarcely below the level of interest rates are accepted for building. An increase in interest rates would put the market under pressure. However, the salient point is the state of the German real economy.